Analysis: China economy resilient, for now

Published June 23, 2011

Reuters

June 23, 2011 – By Kevin Yao

BEIJING (Reuters) - China's growth is slowing under the weight of Beijing's anti-inflation campaign and weaker global demand, but any investors betting on a hard landing would be underestimating the resilience of the world's second-largest economy.

China's relentless urbanization continue to drive expansion even as Beijing seeks to check unfettered investment by growth-obsessed local authorities, while stronger domestic consumption is providing a firmer cushion against external shocks.

China bears may have been emboldened on Thursday by a purchasing managers' survey showing growth in the factory sector nearly stalled in June as new export orders fell.

But skeptics who are expecting an abrupt economic slowdown may have miscalculated Beijing's resolve to act quickly if needed to revive growth, especially if inflation eases later this year as expected, reducing the need for fresh monetary tightening measures, analysts say.

"The economy is set up for growth. You've still got urbanization and industrialization to come and all the incentives at local government levels are still to do with encouraging growth," said Stephen Green, an economist at Standard Chartered Bank in Hong Kong.

"People always over-worry about a China hard landing. Clearly there are a lot of problems with the economy but people may underestimate the government's ability to muddle through."

Green expects some policy relaxation later this year as price pressures start to moderate.

NO HARD LANDING?

Global investors are unnerved by any sign of a slowdown in China, a key global growth engine, even as the U.S. economic recovery loses momentum and Europe struggles with a sovereign debt crisis. An abrupt slowdown in China could hammer international financial markets and stifle demand for commodities from iron ore to soybeans.

The economy has expanded at an average annual pace of 10 percent in the past three decades.

Fears of a hard landing have gained traction as a recent stream of data showed the turbo-charged economy is cooling, but for now China shows no signs of following the West with growth levels falling well below long-term trends.

Indeed, most market watchers typically define a hard landing in the Chinese context as a sudden dip in quarterly GDP growth below 8 percent, a level advanced economies can only dream about.

The 8 percent threshold is, more importantly, a political line in the sand for Beijing, which it deems to be the minimum level needed to create enough jobs to ensure social stability.

The last time the economy showed signs of a sudden slump, during the depths of the global financial crisis in late 2008, Beijing announced a 4 trillion yuan ($600 billion) stimulus plan, quickly returning to double-digit growth.

While few argue with the success of that scheme, many economists say the spending binge also sowed the seeds of inflation and created excesses such as unrestrained lending and property bubbles which are aggravating imbalances in the economy, leaving it more vulnerable if the current "soft patch" in Western demand turns out to be a prolonged downturn.

MORE STIMULUS?

Policymakers will certainly have more room to consider fresh pump-priming if inflation peaks in June or July near 6 percent, as widely expected, and then moderates steadily in the second-half of the year.

Dong Tao, an economist at Credit Suisse, believes the central bank will not rush to relax policy for fear of fueling further property price rises, but said the government will unleash its spending power to prevent growth from slowing too much.

"Should the threat of a hard landing emerge, we would expect fiscal stimulus to come to the rescue, instead of monetary easing. Providing funding to policy housing and speeding up infrastructure projects would be the easy options," he said.

China has already announced an ambitious plan to start building and upgrading 36 million affordable homes between 2011-2015, with 10 million to be completed this year, to quell growing public discontent over rapidly rising house prices.

Many economists, while trimming their growth forecasts for China, don't believe the current slowdown will amount to a slump akin to that during the global financial crisis.

Most still expect GDP growth of more than 9 percent in the second quarter from a year earlier compared with 9.7 percent in the first quarter, with full-year growth seen at about 9 percent.

"I'm not worried about the risk of a hard landing in China. It's a low-probability event this year and next year," said Gao Shanwen, chief economist at China Essence Securities in Beijing.

After all, a gentle easing in growth is exactly what Beijing wants and is in line with its policy to priorities' efforts to cool inflation.

"The slowdown is essentially part of the deal. you need to a slowdown to reduce excesses and control inflation," said Kevin Lai, economist at Daiwa Global Markets in Hong Kong.

OVERHAUL

U.S. economist Nouriel Roubini, who foresaw America's housing crisis, said China faces a "meaningful probability" of a hard landing after 2013, mainly due to over-investment.

Roubini said investment was already 50 percent of China's GDP and that 60 years of data had shown that over-investment led to hard landings, citing the Soviet Union in the 1960s and 70s, and East Asia before the 1997 financial crisis.

China does face a host of risks, including a property bubble, mounting local government debt and potential rises in bad loans.

But there is little sign they would explode soon. China has in the past repeatedly defied predictions of a crash.

Andy Xie, an independent economist, argues for a soft landing in China, noting Chinese households are not highly indebted and most bank loans have been channeled to government projects.

"When a borrower is in technical default, it usually doesn't lead to asset seizure followed by liquidation, which is the cause of a hard landing," he wrote in an article.

"Instead, in the Chinese context, both lender and borrower are usually government owned. Debt rescheduling is almost automatic. Hence, as long as money supply grows, it will be spent and translate into demand."

"The global crisis has brought urgency to China's rebalancing need. It is also a great opportunity," Xie said.